(BBG) EU Expected to Slash Italy Growth Estimate in Blow to Coalition

The European Commission is expected to slash the Italian economic growth estimate for this year when it releases new forecasts later Thursday, major newspapers including Il Messaggero and la Repubblica reported.

The forecasts will follow separate IMF criticism the day before that the Italian government is falling short on needed reforms.

The Commission will probably cut the Italian growth estimate to 0.2 percent from the 1.2 percent foreseen in November, according to Messaggero and Repubblica. Lower growth will make it more difficult for the populist coalition to carry out its expansive spending plans.

The Washington-based International Monetary Fund on Wednesday issued a report on the 2018 review of Italy less than a week after the national statistics office said the country fell into recession at the end of last year.

“The authorities’ strategy falls short of comprehensive reforms needed to address the longstanding structural impediments to sustained growth and, therefore, risks leaving the economy vulnerable,” the International Monetary Fund said Wednesday at the end of its consultations.

The populist government that took office on June 1 is implementing an expansive spending program that includes income support for the poor and a lower retirement age.

Finance Minister Giovanni Tria said the IMF report “underestimates the necessity to support growth in Italy and in Europe, and the role of the policies adopted by the government toward this goal.”

Tria said in a statement Wednesday evening that the government is committed to reducing the debt and there is no cause for alarmism and “no intention to destabilize the markets.”

The ruling coalition expects 1 percent growth this year, while the country’s central bank and the IMF in separate reports have estimated 0.6 percent for 2019.

Growth is projected to stay below 1 percent annually for five years, ending 2023 at 0.6 percent, the IMF said.

Recovering Modestly

The IMF noted that the economy has been “recovering modestly” from the financial and sovereign debt crises.

Intesa Sanpaolo CEO Carlo Messina struck an optimistic note in an interview with Bloomberg Television on Wednesday.

“I think that in the second part of the year, we can have a clear recovery due to internal demand acceleration,” the Italian banker said in an interview with Bloomberg’s Nejra Cehic. “My expectation is that we can have a recovery in the exports in the second part of the year.”

Italy approved a compromise budget in late December following weeks of wrangling with the European Commission that spooked investors and sent yields on 10-year government bonds soaring to 3.81 percent on Oct. 19. They have since fallen to about 2.8 percent from the 4 1/2-year high.

“Weak profitability and sustained high sovereign yields pose challenges to the banking system,” according to the IMF’s Article IV report.

The fund welcomed the government’s goal of reducing Italy’s public debt, which at more than 130 percent of gross domestic product is the second-highest ratio in the euro area after Greece.

‘Heightened Stress’

“Spillovers from heightened stress in Italy would be global and significant,” the IMF staff said in an accompanying report dated Dec. 18.

“Acute stress in Italy could push global markets into uncharted territory, for example, if there were to be an unprecedented downgrade to junk status of a very large advanced sovereign issuer,” the staff report said. “Given that Italian debt is held widely, a broad-based reversal of portfolio flows could occur, including from emerging markets. The impact could be large within the euro area.”